ABANDONING A TRADE

2016-05-26 5pm EDT  |  #stocks #gold

I wish I had something smart to say. Or even witty. But the reality is that I am staring at the screen, at a loss to come up with an explanation for these whippy, illiquid moves. Memorial Day week-end is just around the corner and it looks like many traders have already checked out.

It is made all the worse by the ongoing G7 meeting. Rumours and headlines are sending foreign exchange prices zipping back and forth. And it’s not like this G7 meeting is a non-event. There is real strife between the US and Japan about their monetary easing. Fed officials are busy preparing the markets for more hikes, while Japan is “pushing for ‘crisis’ language to be included in G7 communique.” Talk about being on different pages.

Over the past few weeks I have stressed ignoring all the negativity regarding stocks. I also lightened up on my long term gold position. Both of those have been decent calls.

But in life, there eventually comes a time when you need to abandon all items, including your market positions. There is little doubt I will be early with these trades, but I feel naked without a monster slug of gold on the sheets. I am covering all my short calls, and bringing myself back to 80% of my long term position. I will keep the last bit in reserve so that if gold breaks the 1210 support and accelerates, I have some room to catch the panic.

Instead of just buying gold futures, I am picking away at call options. In anticipation of a quiet Memorial Day period, traders are busy sucking 5 days of decay out of the price of most options. Gold implieds were already low, and this decline just makes them all the more attractive.

Even though I am not as long term bearish on the stock market as most hedge funds, I believe it is time to take some stabs at the short side.

The G7 tension, combined with the short term overbought nature of US stocks, topped off with illiquid conditions, makes me think shorting some stocks for a trade offers a good risk reward. I am confused by Fed officials’ insistence on tightening monetary conditions. They are convinced they are behind the curve even though their hawkish rhetoric causes long rates to decline. A flattening yield curve is the opposite reaction that would be expected in an environment where the Federal Reserve was behind the curve.

I am going to skip posting tomorrow and Monday. Be back with regular posts Tuesday.

Thanks for reading and have a great long week-end,
Kevin Muir
the MacroTourist